Budget: Fuel duty freeze and energy bill subsidies give billions to those who don’t need help

Ahead of the Treasury's Budget in two weeks, Business and Economics Editor Joel Hills explains what 2023 could look like financially for British households.

The last year has been brutal, double digit inflation has left everyone feeling poorer.

The typical household in the U.K. saw its spending power fall by an extraordinary £4,000 in the last twelve months, according to the National Institute of Economic and Social Research (NIESR).

But NIESR’s analysis also suggests our prospects for the year ahead look a little brighter.

Interest rates have risen sharply and the outlook for the economy isn’t great but the headline rate of inflation is now falling and is expected to fall further.

Next month, government subsidies for domestic energy bills become less generous but pay growth is strong and benefits and the state pension - which are both pegged to inflation - will rise significantly.

Approximately 75% of households will start to feel better off over the next 12 months, but those on the lowest incomes will lose out. Credit: NIESR

As a result, NIESR forecasts that 75% of households in the UK are likely to start feeling better off during 2023/24. However the outlook for those on the lowest incomes remains grim - their real incomes are forecast to fall again, even with ongoing “cost of living” cash support from government. And NIESR estimates that in a year’s time 14 million households in the bottom half of the income distribution will still have lower living standards than two years ago. NIESR argues the likely contrast in fortunes between higher and lower earners should inform the decisions the chancellor makes in his Budget in two weeks time.

Jeremy Hunt is under pressure not to change the government’s Energy Price Guarantee (EPG) - which currently limits the typical household energy bill to £2500 a year. The cap is due to rise £3000 a year from April.

He’s also under pressure to freeze fuel duty which is set to rise next month, adding around 15 pence a litre to the pump price of petrol and diesel.

NIESR believes it would be a mistake for him to do either of these things.

Professor Adrian Pabst says maintaining government energy support for all households would be “very regressive”.

“There is something to be said for universal help but it’s costing billions and billions of pounds and we think that money would be better targeted at those who genuinely can’t afford to go further into debt and see their savings wiped out by this cost of living crisis,” says Professor Adrian Pabst.

“Higher income households are seeing their wages and their income from assets grow very strongly. They can afford to take a temporary hit.” Freezing fuel duty and maintaining taxpayer support for energy support for all households would be popular decisions but Pabst believes they would also be “very regressive”.

He points out wealthier households would benefit disproportionately as they tend to use more energy and to own larger cars and and drive more frequently.

In his view, higher earners, specifically UK households with an annual post-tax disposable income of £42,000 or more, should now be able to get by without further emergency help from government.

“Of course it’s hard,” Pabst explains. “No one pretends it is easy or pleasant. We are all permanently poorer as a result of all of these shocks [COVID, the war in Ukraine, Brexit] but when you have higher incomes, when you have higher savings, you can take that hit.”

NIESR believes the chancellor should be designing extra support for the 14 million households in the bottom half of the income distribution.

Pabst recommends channelling money through cash payments or through the benefit system. He thinks the government should push ahead immediacy with plans for a “Social Tariff Discount”, where people on means-tested benefits will pay a lot less for their energy (it’s currently proposed for 2024).

Jeremy Hunt may decide the popular thing to do is also the best thing to do. Not least as he’d probably upset a lot of his own MPs, particularly those representing rural areas, if he didn’t freeze fuel duty again.

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